MODULE BUSINESS FINANCE

CHAPTER 1
INTRODUCTION TO PHILIPPINE FINANCIAL SYSTEM

Learning Objectives:
1. Understand the History of Philippine Banking
2. Enumerate important functions of Bangko Sentral ng Pilipinas
3. Remember the Instruments of Monetary Control
4. Understand the Philippine Financial System and its Elements
5. Utilize the features of the Philippine Currency

HISTORY OF PHILIPPINE BANKING

Banking in the Philippines began in the 16 th century with the establishment of

Obras Pias (pious works) by laymen associated with religious orders. Funded from the
legacies and donations of wealthy individuals, the Obras Pias were then the sole
source of commercial credit. Its funds were invested in mortgage financing loans, trade
with Acapulco and maritime insurance. Obras Pias profits were channeled to the
construction of churches, government buildings and other charitable and religious
projects.
In the early 19th century, among the first banks that emerged was the
Rodriguez Bank – more of a loan association than a regular bank. On August 1, 1851
the Board of Authorities (Junta de Autoridades) led to the establishment of the Banco
Espanol-Filipino de Isabel II, the first state bank in the Philippines because of the need
for more extensive bank services and facilities in Manila.

In 1873, British –Orient banks opened branches in the country as a result of

the expanded Philippine –European trade that followed the opening of the Suez Canal
in 1869. In 1872, the Chartered Bank of India, Australia and China opened a branch in
Manila, and later on in Iloilo and Cebu. In 1875, The Hongkong and Shanghai Banking
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Corporation established its branch in Manila. In 1882, The Monte de Piedad y Caja de
Ahorros, the first mutual savings bank was opened and was provided capital by the
Obras Pias. This is a combination of savings bank and pawnshops. The bank was then
renamed Monte de Piedad and Savings Bank.

The Banco Espanol-Filipino de Isabel II changed its name to Bank of the

Philippine Islands on January 1, 1912. This is now the oldest existing bank in the
country.
In 1906, the Postal Savings Bank was put up. The first agricultural bank was
established in 1908 but its assets and liabilities were transferred to the Philippine
National Bank which was organized in 1916.

Three years after the American regime ended, the Central Bank of the
Philippines was created, establishing a managed monetary system in the Philippines. It
was in the sole authority to issue the republic’s new paper money, regulate and
supervise the country’s banking system. More private commercial banks and savings
banks went into operation later.

BANKING

Banking is the service performed by

that financial institution known as a bank,
which is primarily concerned with the
safekeeping of funds through the
acceptance of deposits of money, and the
provision of credit through lending of money.

Banking covers a wide range

of services to the public. These services
include receiving, collecting, transferring,
paying, lending, investing, dealing,
exchanging, and handling money (safe deposit, custodianship, agency, trusteeship)
and money claims both domestically and internationally.

The following are the banking institutions that provide the above services in
varying degrees:

1. Commercial Banks cover the widest range of functions among all financial
intermediaries. Aside from the various functions of the commercial banks, they also
finance and facilitate international trade. Some of the excess funds of commercial
banks are kept in other banks with which they do business. They call these banks
their correspondent banks. In additional to full domestic and international banking,
commercial banks can be authorized to perform the functions of an investment
house like underwriting and securities dealership and investing the equities of both
financial and non-financial entities. Commercial banks that carry this expanded
authority are called universal banks.
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2. Thrift banks are savings and mortgage banks, stock savings and loan associations,
and private development banks which, in addition to accepting savings and time
deposits, perform the following functions: grant loans; invest in readily marketable
bonds and other debt securities, commercial papers and account receivable, drafts
and bills of exchange; issue domestic letters of credit. They differ from commercial
banks because they cannot engage in international banking operations.

3. Rural banks are regional banks operating primarily to serve the needs of people in
the rural areas with the following functions:
a. Grant short-term loans to farmers, merchants and cooperatives to
finance their requirements in the pursuit of their business which are
principally aimed at countryside development;
b. Accept savings and time deposits to accumulate funds for local
development;
c. Serves as channels for disbursement and collection of supervised credit
programs; and
d. Act as correspondents for other financial institutions

4. Specialized government banks are those created by the government for specific
purposes under special charters. These are the Development Bank of the
Philippines, the Land Bank of the Philippines, and the Philippine Amanah Bank.

a. The Development Bank of the Philippines was established in 1946 as the

Rehabilitation Finance Corporation to attend to the requirements of
rehabilitation and development after World War II.
b. The Land Bank of the Philippines was organized in 1963 to provide
timely and adequate financial support to the Agrarian Reform Program.
c. The Philippine Amanah Bank was established in 1974 to promote and
accelerate the socio-economic development of Mindanao, especially in
the predominantly Muslim provinces.

Commercial Banks accepts several forms of deposits, namely: demand deposits,

time deposits, and savings deposits.

a. Demand deposits are also known as current accounts or checking accounts.

b. Time deposits are accounts with a maturity date at higher interest rates. Pre-
termination of time deposits is permissible. A certificate of deposit (CD) is
issued for this account serving as receipt that a depositor has placed a
particular amount of funds at a bank for a particular period of time. In return
the bank as agreed to pay a certain rate of interest over the life of the deposit.
(Cooper: Frashner). CDs are considered as money market instruments which
can be traded in a secondary market. A large CD must have a minimum
maturity of at least fourteen days.
c. Savings account has no maturity date and has a lower interest rate than time
deposits. This can be referred to as a person ’callable’ account.
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THE BANGKO SENTRAL NG PILIPINAS

The BSP is responsible for maintaining price stability conducive to a

balanced and sustainable growth of the economy. The BSP keeps prices of goods and
services steady and at reasonable levels so the economy can run unhampered.

The BSP was created under Section 2 of RA7653, better known as “The
New Central Bank Act”. It traces the roots and fundamental structure from its
predecessor, the Central Bank of the Philippines. The Bank began formal operations
on July 3, 1993.

The BSP performs several important functions that have a significant effect on
the value of your money.

1. The Money Manager. The BSP manages the amount of money available
to the public to keep prices from increasing more than usual.
2. The Supplier of Money. Only the BSP can legally issue money in paper
notes and coins and in amounts consistent with the country’s economic
program. The BSP also prints the paper money and mints the coins.
3. The Banker’s Bank. The BSP grants loans to and accepts deposits only
from banks.
4. The Supervisor of all Banks. In the exercise of its responsibility to
supervise banks, the BSP regularly monitors and examines the operation
operations of banks as well as their compliance with banking rules and
regulations.
5. The Main Bank of the Government. The BSP is the official depository of
the government.

The BSP Monetary Board is the policy-making body of the Bank. It is headed
by the BSP Governor who is concurrently the Chairman of the Board, with five full-time
members from the private sector and one member from the Cabinet.
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A deputy governor heads each of the Bank’s three major operating sectors which
are:
1. The Banking Services Sector serves the banking needs of all banks
through the combined banking effort of these BSP department and
offices.
2. The Supervision and Examination Sector takes care of enforcing banking
laws and monitoring compliance so as to promote a banking system that
is safe and sound.
3. The Resource Management Sector serves the personnel, security and
transport, computerization building and facilities and other administrative
needs of the BSP. Its Accounting Department takes care of the BSP’s
books of the accounts plus the regular accounting transactions between
the banks and the BSP. Also under the RMS deputy governor’s care is
the Security Printing Complex which prints out paper and mints our coins
and refine the gold mined in the country.
4. Some offices are directly under the Office of the Governor. The Treasury
Department manages the Bank’s treasury holdings; the Department of
Economic Research monitors economic statistics to draw-up the proper
monetary policies; the Public Information, Relations and Special Events
Office (PIRSEO) services the public relations needs of the Bank; and the
Internal Audit Office checks that each BSP office is doing its job in
accordance with its mandate.

To carry out its mandate, the BSP focuses on three main pillars: price
stability, financial stability, and an efficient payments and settlements system.

a. Price Stability. The BSP’s main responsibility is to formulate and

implement policy in the areas of money, banking and credit, with the
primary objective of preserving price stability. Price stability refers to a
condition of low and stable inflation. Monetary policy refers to the
measures or actions taken by the BSP to help keep inflation low and
stable. The BSP conducts monetary policy using an approach called
inflation targeting.

b. Financial Stability. The BSP supervises banks, quasi-banks and their

subsidiaries as well as affiliates by ensuring compliance with rules and
regulations. It requires banks to adopt the Philippine Financial Reporting
Standards, based on International Accounting and Financial Reporting
Standards.

c. Efficient Payments and Settlement System. Transactions settled in cash,

check, stored value cards, involving small amounts, as well as
transactions on interbank loans, purchases and sales of government
securities, foreign currency sales and purchases, as well as high value
customer payments require critical area of supervision by the BSP. It
provides the necessary infrastructure for facilitating these transactions
between banks through their accounts maintained with the BSP. This is
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known as the Philippine Payments and Settlements System or PhilPaSS.

PhilPaSS is the real time gross settlement system operated and
maintained by the BSP.

THE MONETARY BOARD

Article II: Republic Act No. 7653: The New Central Bank Act
The powers and functions of the Bangko Sentral, who shall be exercised by
the Bangko Sentral Monetary Board, hereafter referred to as the Monetary Board,
composed of seven (7) members appointed by the President of the Philippines for a
term of six (6) years. The seven members are:

a. The Governor of the Bangko Sentral who shall be the Chairman of the
Monetary Board.
b. A member of the Cabinet may be designated by the President of the
Philippines.
c. Five (5) members who shall come from the private sector all of whom
shall serve full time: Provided, however, that of the members first
appointed under provisions of this subsection, three (3) shall have a
term of six (6) years and other two (2) three (3) years.

INSTRUMENTS OF MONETARY CONTROL

Techniques used by the Bangko Sentral to determine the country’s total

money supply are called general controls because they affect financial conditions.
The following are the quantitative instruments used:
 Open market operations. This refers to the purchase and sale of
government securities by the Bangko Sentral.
 Discount rate policy. When member banks borrow from legal
reserves, the reserves of the banks are increased by the amount
equal to the borrowings. The Bangko Sentral can affect the total
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volume of the borrowings by increasing or decreasing the rate of

interest charged to member banks, known as discount rate.
 Reserve requirements. Bank reserves shall be proportional to the
bank’s deposits liabilities and shall ordinarily take the form of a
deposit in the Bangko Sentral.

The following are the qualitative instruments of monetary control:

 Stock market credit/open market operations. Setting a minimum

margin requirement on the purchase of stock. The margin
requirement is the down payment a purchaser of stock must pay
to buy the stock on credit.
 Moral suasion. This describes a variety of informal methods used
by the Bangko Sentral to persuade its member banks to behave in
a particular manner. This includes publication of speeches given
by the member of the Monetary Board, letter sent to all member
banks, programs of credit restraints, conferences and guidelines.

OTHERS LAWS RELATED TO PHILIPPINE MONETARY SYSYTEM

 Philippine Coinage Act of 1903. This defines monetary system as follows:

that gold coins contain 12.9 grains of gold and .9 fineness: and silver coin
contain 416 grains of silver and .9 fineness .
 U.S Coinage Act of 1903. Philippine money was redeemable in drafts or
checks payable in full gold standard currency.
 Gold Reserve Act of 1934. Under this monetary standard, the Philippine
currency was not redeemable in gold but instead in dollars.
 Dollar Exchange Standard. Philippine currency was redeemable in dollar
instead of gold.
 “Mickey Mouse” Notes. The Japanese military government issued paper
bills called ‘mickey mouse’ notes, not because they were legal tender but
because of fear from authorities on grounds of non-cooperation.
 Managed Currency System. With the creation of Central bank, the country’s
monetary system and banking system were reorganized. Central Bank Act,
known as Republic Act No. 265 was enacted. Chapter 2 of the Central Bank
Act defines the monetary unit as “Peso” divided into one hundred equal
parts called “Centavo”.

CHARACTERISTICS OF PHILIPPINE CURRENCY

The Bangko Sentral shall have the sole power and authority to issue
currency, within the territory of the Philippines. Notes and coins issued by the Bangko
Sentral shall be liabilities of the Bangko Sentral and may be issued only against, and in
amounts not exceeding the assets of the Bangko Sentral.

The Monetary Board, with the approval of the President of the Philippines, shall
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prescribe the following features of the notes and coins:

a. Denominations – this includes the face value of each coin and paper bill.
b. Dimensions – these are the sizes of coins and paper bills.
c. Designs and inscriptions – the graphics or text imprinted on each money.
d. Colors – variations in color of each denominations of easy recognition.
e. Weight – this includes the paper weight and metal weight of the alloy for
coins

The Bangko Sentral shall exchange, on demand and without charge,

Philippine currency of any denomination or Philippine notes and coins of nay other
denomination requested. If for any reason the Bangko Sentral is temporarily unable to
provide notes and coin of the denominations requested, it shall meet its obligations by
delivering notes and coins of the denomination which most nearly approximate those
requested. This refers to the interconvertibility of currency – the replacement of notes
and coins with another denomination for the same value.

Notes and coins whose identification is impossible shall be replaced by the

Bangko Sentral. Coins which show signs of filing, clipping or perforation, and notes
which have lost more than two fifths (2/5) of their surface, lost serial number and all the
signatures inscribed thereon shall be subject for replacement, without compensation to
the bearer.

The Bangko Sentral may call for notes of any series or denomination which
are more than five (5) years old and coins which are more than ten (10) years old.
Notes and coins called in for replacement shall remain legal tender for a period of one
(1) year from the date of call.

THE PHILIPPINE FINANCIAL SYSTEM: ITS ELEMENTS

The financial system includes processes and procedures used by an

organization’s management to exercise financial control and accountability. Measures
include recording, verification and timely recording of transactions that affect revenues,
expenditures, assets and liabilities. The major role of a financial system is to set a
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meeting point between available economic agents and those with financial needs.

At the global level, financial systems would include the International

Monetary Fund, central banks, World Banks, borrowers and lenders within the global
economy.

In finance, this will allow the transfer of money between investors and
borrowers. This system will channel household savings of families to the business
sector and allocate investment funds among firms, allowing interdependent flows of
household consumption and corporate expenditures, enabling these sectors to share
risks on transactions.

The Philippine financial system includes financial institutions, financial markets

and financial claims.

a. Financial institutions consist of private and government organizations

whose main assets are incomes or claims derived in the performance of
financial services. These are commercial banks, savings and loan
associations, and finance companies.
b. Financial markets are institutions which bring together parties in the
buying and selling of financial claims. These may include the Philippine
Stock Exchange and other similar groups dealing with money market
operations.
c. Financial claims include rights to receive money based on financial
instruments presented.

PRIVATE BANKING INSTITUTIONS

These companies perform the service of safekeeping funds through the

acceptance of money deposits, and the provision of credit through lending of money.
Bank assist in the mobilization of funds needed for various industries and other
productive undertakings. These are: commercial banks, thrift banks and rural banks.

GOVERNMENT BANKING INSTITUTIONS

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To supplement the credit facilities of the private institutions is the role of the
government in the banking system in the country. These banks are: Philippine National
Bank, Development Bank of the Philippines, Land Bank of the Philippines; and
Philippine Amanah Bank. (Fajardo, Manansala)

1. Philippine National Bank. Aside from the granting of loans and credit,
PNB is authorized:
 To purchase, discount or negotiate promissory notes, drafts, bills
of exchange and other evidences of debt issued or drawn for
agricultural, export, industrial, commercial and other similar
purposes with collaterals which may be required by the bank;
 To grant loans on, or to discount notes secured by, harvested and
stored crops; to grant loans for the production of rice, corn, and
other grains, cotton, hemp, coconut, sugar, banana, tobacco, and
other agricultural crops;
 To grant medium-term and long-term loans and advances against
security of real estate and/or other acceptable assets for the
establishment, rehabilitation or expansion of agricultural export,
industrial and other productive enterprises;
 To grant loans against personal security, or against security
consisting of personal property or first mortgage on improved real
estate and the insured improvements thereon; and
 To make loans to any branch, subdivision, or agency of the
government, including government-owned and/or controlled
corporations, which loans shall be for productive, revenue, or
socio-economic projects as established in the development
programs of the government.
2. Development Bank of the Philippines was established in 1946 as the
Rehabilitation Finance Corporation to attend to the requirements of
rehabilitation and development after World War II. Today, it is tasked
with the development and expansion of agricultural industry and
promoting the establishment of private development banks.
3. Land Bank of the Philippines was organized in 1963 to provide timely
and adequate financial support the the Agrarian Reform Program.
4. Philippine Amanah Bank was established in 1974 to promote and
accelerate the socio-economic development of Mindanao, especially in
the predominantly Muslim province and economically depressed areas
of Cotabato, Lanao del Sur, Lanao del Norte, Zamboanga del Sur,
Zamboanga del Norte, and Sulu.

PRIVATE NON-BANK FINANCIAL INSTITUTIONS

 Investment houses are companies engaged in underwriting securities of other

corporations. As underwriters, they guarantee the distribution and sale of
securities issued by corporations, including bonds, debentures, notes,
subscriptions, trust agreements or investment contracts.
 Investment companies are financial institutions that aise funds in the capital
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market by selling their own issues of securities, mainly common stocks, to

individual investors.
 Financing companies extend credit facilities to consumes and to industrial,
commercial, or agricultural enterprises.
 Securities dealers/brokers are intermediaries in the marketing process, as
brokers, dealers or underwriters.
 Non-stock savings and loan associations are corporations engaged in the
business of accumulating the savings of its members.
 Building and loan
associations are called mutual building and
loans associations. These corporations
whose capital stock is to be paid by the
stockholders in regular, equal periodical
payment, and whose purpose is to
accumulate the savings of stockholders.
 Pawnshops are entities
engaged in the business lending money on
personal property delivered as security for
loans.
 Trust corporations act
as trustee or administrator of any property or
trust, and deposit.
 Insurance companies
provide the mechanism for distributing
equitably losses among a large number of persons who are subject to a
particular risk.
 Fund managers can be a bank or non-bank financial institution performing
quasi-banking functions engaged in the administration and management of
property or money; or an agent or representative of the owner or a third person.
 Lending investors receive funds from one group of persons, regardless of
number, through traditional deposits, or issuance of debt and equity securities;
and make available or lend these funds to another person or entity, who cannot
borrow from banking institutions due to stringent requirements.
 Venture capital corporation was organized under Presidential Decree No.
1688 on 1980 to assist small and medium-scale industries. Jointly organized by
the National Development Corporation and Technology Resource Center, for
the purpose of developing, promoting, and assisting thru debt or equity
financing, small and medium-scale enterprises in the country.

GOVERNMENT NON-BANK FINANCIAL INSTITUTIONS

1. The Government Service Insurance System (GSIS) was entrusted with

the administration of a Life Insurance Fund to government employees in
the country. At present, GSIS also administers the following:
-Retirement Insurance Fund
-State Insurance Fund/Employees’ Compensation
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-General Insurance Fund/Property Insurance

-Barangay Officials Life Insurance Fund

2. The Social Security System (SSS)

grants to its members, those from the
private sector, benefits such as
sickness, disability, death, and old-age
pension. Additional benefits have been
incorporated, including hospitalization
benefits, employees’ compensation
benefits, and maternity benefits.

For further discussion please refer to the link provided: Philippine Financial system.
https://www.youtube.com/watch?v=MsPgw4FodgE
For further discussion please refer to the link provided Contents of a Bangko Sentral ng Pilipinas
https://www.youtube.com/watch?v=5yv1QCkCUpY

Reference:
Basic Business Finance: Management Approach, 2 nd Ed., Ruby F. Alminar-Mutya, DBA